Monthly Archives: February 2012

Planning for the Future of Your Business

By Louis Pashman, Esq.
lpashman@pashmanstein.com

You own a successful family business. It’s time to plan for the next generation. Remember, one out of three family businesses fails in the second generation and the figure is even more distressing in the third generation. Consider the following situations and apply this advice where it fits.

1. You own the business with your sibling (or another family member) and members of the next generation from both families are active in the business. The situation is comparable if you own the business yourself and more than one of your children is involved in the business and capable of running it. In either event, it is generally wise to identify who in the next generation is most capable of running the business. Because it is always difficult to split leadership, you must take proactive steps to work out ownership interests and rights to management, possibly using such tools as trusts, buyouts, and annuities to ensure an equitable distribution of assets.

2. You own the business yourself and you have three children, none of whom is involved or interested in the business. You likely will want either to sell the business during your lifetime or bring in an outsider to run the business during your life, with a buyout upon your retirement or death. The buyout, properly structured, can also help provide for your family after your retirement or death.

3. You have more than one child, but only one is involved in the business and is qualified to run it. In this event, business succession is fairly straightforward. The more difficult issue is—assuming you want to treat your children equally—how do you leave the business to one child and provide equally for the others after death? Consider life insurance, trusts, buyouts, and other tools.

There are many variations on these scenarios and just as many ways to deal with each of them. The first requirement is that you deal openly and honestly with your children (and your co-owner’s family, if applicable). Open communication allows you and your family to plan properly in a way that will minimize disruption to the business and the family and at the same time allow you to take advantage of available tax provisions. Consult your professional advisers and be honest with them as well.

New Jersey Becomes the 47th State to Adopt the Uniform Trade Secrets Act

By Sean Mack, Esq.
smack@pashmanstein.com

On January 9, 2012, Governor Christie signed into law the New Jersey Trade Secrets Act.  N.J.S.A. 56:15-1 to -9.  New York, Massachusetts and Texas are now the only three states that have not adopted a version of the Uniform Trade Secrets Act.

The Act (i) brings better clarity to the definition of a trade secret and the remedies available, (ii) provides a guide to litigants and judges regarding protecting trade secrets during court proceeding, and (iii) specifically sets a statute of limitations for misappropriation of trade secrets claims.

The Act builds off of prior judicial decisions and should not significantly change the meaning of what is a trade secret.  Under the Act, a trade secret is specifically defined as:

information, held by one or more people, without regard to form, including a formula, pattern, business data compilation, program, device, method, technique, design, diagram, drawing, invention, plan, procedure, prototype or process, that:

(1) Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and

(2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

The Act also makes clear that injunctive relief, and damages or royalties may be available for prevailing parties.  The Act clarifies that damages may be calculated based on the actual losses caused by the misappropriation and based on the unjust enrichment obtained by the wrongdoer as a result of the misappropriation.  Royalties may be awarded instead of, but not in addition to, the award of damages.  The Act also provides for the awarding of punitive damages if the misconduct is willful and malicious.  Punitive damages are capped at twice the damage award.  In a departure from the common law precedent in New Jersey, the Act expressly authorizes the award of attorney’s fees to the prevailing party (plaintiff or defendant) in appropriate cases.

The Act should be a warning to companies hiring new employees that they can be held liable for misappropriation of trade secrets if they induce the employee to wrongly disclose trade secrets or if the company has reason to know of the employee’s breach.

In an effort to balance New Jersey’s long standing public policy in favor of public access to legal proceedings against a company’s legitimate need to maintain the secrecy of its trade secrets, the Act mandates that courts take reasonable means to protect the secrecy of the information.

Finally, under the common law parties usually relied on New Jersey’s six-year statute of limitations in connection with misappropriation claims.  The Act now specifies that misappropriation of trade secret claims must be brought within three years of the discovery of the misappropriation or three years of when the party should have had reason to know of the breach.

Unpaid Interns and Trainees Can Become a Big Expense

By Andrew Moskowitz, Esq.
amoskowitz@pashmanstein.com

On February 1, 2012, a former Hearst Corporation intern filed a lawsuit in the Southern District of New York.  The suit was filed as a class and collective action under the Fair Labor Standards Act, 29 U.S.C. §§ 201 et seq., and purportedly involves hundreds of former Hearst interns.  The case, Wang v. The Hearst Corp., Civ. No. 12-0793, highlights the  dangers that companies face when they employ unpaid individuals to perform routine work tasks.

Employers are required to pay most employees minimum wage (which is $7.25 per hour under New York and New Jersey law) and “time-and-a-half” for all hours worked in excess of 40 hours per week.  Under federal law, to classify someone as an unpaid “trainee,” employers must meet some or all of the following criteria:

  1. The trainees do not displace regular employees, but rather work under close observation;
  2. The training is for the trainees’ benefit and the employer derives no immediate advantage from the trainees’ activities and, on occasion, its operations may actually be impeded;
  3. The trainees are not necessarily entitled to a job at the completion of the training;
  4. The training, even if it includes the actual operation of the employer’s facilities, is similar to that which would be given in an educational environment such as a vocational school; and
  5. The employer and the trainees understand that the trainees are not entitled to wages for the time spent in training.In general, under federal law, all of the above criteria need not be met; rather, courts look at the totality of the circumstances.

In contrast, under the New Jersey Wage and Hour Law, N.J.S.A. 34:11-56a et seq., all of the above-listed criteria must be met.  In addition, New Jersey law imposes additional requirements.  Specifically, the training must occur outside regular work hours.  Moreover, the employee may not perform productive work while attending the training and the program cannot be directly related to the employee‘s present job.

An employer that fails to comply with the above does so at its peril.  Under federal law, an employee may recover not only back pay but also “liquidated” or double damages and reasonable attorney’s fees and costs.

What’s the “Corporate Opportunity Doctrine”?

By Bruce Ackerman, Esq.
backerman@pashmanstein.com

In New Jersey, the law imposes certain obligations on all owners, officers and corporate directors.  As a general rule, all such corporate “insiders” as they are called, have a heightened duty of loyalty to the corporation, described as a fiduciary duty.  As part of that fiduciary duty, the New Jersey Supreme Court has imposed a particular duty on such insiders called the “Corporate Opportunity Doctrine”, which restricts all corporate insiders from taking advantage of outside business opportunities while serving the company.  Recently, the New Jersey legislature has provided a unique opportunity to corporations to renounce this doctrine.

In essence, the officers and directors of a corporation have a high duty of loyalty to the corporation and cannot use this position of trust and confidence to further their own interests.   In other words, this duty requires that insiders not profit at the expense of the company they serve, whether by self-dealing or by otherwise diverting company opportunities presented to them.  When found to have violated that duty, the insider can be directed to pay to the corporation all the profits he or she earned from that outside opportunity.

It seems so logical to a business owner to want to restrict the company insiders from taking on these competitive opportunities without first offering them to the company.  However, despite this doctrine guiding the conduct of company insiders in New Jersey for more than 50 years, in 2011 the Legislature chose to allow any corporation to renounce this doctrine and set its insiders free to compete, so to speak.  Why would the Legislature take decisive action to allow any corporation to renounce the doctrine, thereby setting its officers and directors free to compete?  The answer lies in providing flexibility by leveling the playing field between corporations and limited liability companies, by removing a potential disincentive to investing in a New Jersey corporation, and to enhance the ability to attract outside business expertise to join New Jersey companies.

It is commonplace for limited liability companies to provide in the operating agreement that its members, even managing members, may take on any other business opportunity without liability to the LLC.  Until this new law, corporate insiders did not have the right to do the same.  Now, even a smaller company that wants to use the corporate form can have that flexibility by stating its intentions in either its certificate of incorporation or by resolution of its Board of Directors.

That flexibility is often needed on several fronts.  Mostly for mid-size and larger entities, it is often a condition of investment by third parties that they control one or more seats on the corporation’s Board of Directors.  No such investors, or their nominated directors, can permit themselves to be limited in their other business interests by taking on that position.

When a company is seeking outside business expertise to join the company either on its Board of Directors or in another official capacity, the corporate opportunity doctrine may stand in the way.  Rather than having such an obstacle, the Board can remove the application of the doctrine, even if only for a specific outside interest in order to attract a particular expert to assist the company.

Whether to renounce the corporate opportunity doctrine requires a careful analysis of company needs now and in the future.